Introduction

Following covid 19 when remote work became commonplace, or the only way to work, the concept of remote work has allowed employees to work from virtually anywhere. While this flexibility can be a win-win for both employers and employees, it also introduces complex tax considerations, particularly when employees are working from international locations. In this blog post, we will delve into the tax implications for employers of letting their employees work remotely in international locations, addressing potential dangers and offering solutions to minimize tax liabilities.

Ultimately, much of the exposure can be limited by restricting employees’ movement to countries that have a tax treaty and a social security totalization agreement with the country of origin, and fall within the parameters of that tax treaty.

Company Registration / Sales Tax / Corporate Income Tax

Company registration: By having a presence in given country, the corporation might be required to register itself with the local authorities. As these vary widely country to country, I will not get into specifics.

Sales tax: When employees work in a foreign country, it can create a nexus for the employer, potentially triggering the duty to collect and remit sales tax on goods or services sold in that area.

Corporate income tax: Tax treaties would exempt the corporation from paying corporate income tax to the foreign country if it doesn’t have a permanent establishment in that country.

A dependent agent (such as an employee), when acting on behalf of an enterprise, can create a permanent establishment if they have the authority to conclude contracts or regularly habitually perform activities on behalf of the employer. However, merely having an employee working in a foreign country does not automatically trigger PE status.

Income Tax Withholdings In Foreign Countries

Allowing employees to work remotely in international locations can also lead to them being liable to pay income tax. In the case of an independent contractor, the independent contractor who would be responsible for its own tax filings. In the case of an employee, while the employees are ultimately liable for their tax filing, employers are typically liable for income tax (and payroll tax, see my next point) withholdings in those countries.

When employees generate income within a foreign jurisdiction, that country’s tax authorities may require the employer to withhold taxes from the employees’ salaries and remit them to the local tax authorities.

To avoid this situation, employers can take advantage of the provisions of tax treaties that relates with “Dependent Personal Services”, which is typically dealt with by Article 15 of said treaty (when it follows the OECD Model Tax Convention).
This article will state that if a taxpayer who is a resident of a contracting state works in the other contracting state, their employment income would be exempt in the second state, subject to certain limitation, for instance the number of days the employee can spend in the other country during the year (typically 183 days) and/or a dollar amount of income that can be earned while in the other country.

Employers can utilize these treaties to reduce or eliminate income tax withholding requirements in foreign countries. You would have to refer to the specific tax treaty for details.

Social Security And Payroll Taxes

In addition to income tax withholdings, employers may also become liable for social security and other payroll taxes in the foreign country where employees are working remotely. These taxes are used to fund social welfare programs and may vary significantly from one country to another.

To address this challenge, employers can look for totalization agreements, which are bilateral agreements between countries that help prevent double social security taxation. These agreements typically stipulate that an employer is not required to contribute to the local social security system of the foreign country when certain conditions are met. Employers should ensure compliance with these agreements to reduce the financial burden associated with social security and payroll taxes.

Here again, you would refer to the specific totalization agreement for details, but it is typical that if an employee is hired in the US, and moves to the other country for less than 5 years, they can remain under the US Social Security System, so here again, the employer would process the payroll taxes and their W-2 as if they were in the US.

Conclusion

Employers should be aware of the tax implications when allowing their employees to work remotely in international locations. The dangers include creating sales tax nexus, potential income tax withholdings, and the responsibility for social security and payroll taxes.

To navigate these main challenges, employers have various options, such as leveraging tax treaties and totalization agreements, in addition to classifying employees as independent contractors where appropriate.

Have a question? Contact Olivier Wagner, 1040 Abroad.